ADF Group Stock: A Small-Cap Gem With Massive Potential

ADF Group is a small-cap TSX stock that has outpaced the broader markets by a wide margin in the last five years.

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Investing in small-cap stocks can be quite rewarding to long-term shareholders, as these companies generally grow at a much higher pace compared to the broader market average. A relatively smaller size allows these companies to remain flexible and target high-growth markets in the process.

Companies trading between the market caps of $200 million and $2 billion are defined as small-cap stocks. One quality small-cap stock trading on the TSX is ADF Group (TSX:DRX). The TSX stock has returned 302% to shareholders in the past year and has surged roughly 700% since February 2019.

Let’s see if it remains a viable investment option right now.

An overview of ADF Group

Valued at $285 million by market cap, ADF Group is part of the manufacturing sector with operations in Canada and the United States. It fabricates and installs complex steel structures and heavy steel built-ups, in addition to architectural metalwork services.

Moreover, ADF offers products and services for segments of the non-residential construction industry, which include office towers, high-rises, commercial buildings, airport facilities, and industrial complexes.

ADF serves contractors, project owners, and engineering firms, among others.

How did ADF Group perform in fiscal Q3 of 2024?

In the fiscal third quarter (Q3) of 2024 (ended in October), ADF reported revenue of $82.1 million, up from $65 million in the year-ago period. In the first nine months of fiscal 2024, ADF’s sales totaled $242.6 million, an increase of 21.7% year over year.

ADF reported gross margins of 24.4 in Q3, up from 15% last year. In the last three quarters, gross margins improved to 21.1% from 13.3% in the year-ago period. The variances in gross margins can be attributed to ADF’s operational efficiencies generated by the commissioning of a new robotic production line and automated equipment at its plant in Quebec.

With an order backlog of $339 million, ADF provides significant revenue visibility to investors.

ADF Group bags orders worth $234 million

Last December, ADF Group disclosed it signed a series of new orders south of the border totaling $234 million. In May 2023, it announced it was awarded a large-scale contract for the first phase of a major pharma-based construction project in the Midwest region.

This contract was then amended to include additional work as ADF reached an agreement with the same client for the second phase of this construction project. ADF emphasized that the new contract is “the largest in this series of new orders in terms of value.”

According to ADF, these contracts will require high-volume production and high technical competence. Moreover, its fabrication and assembly processes are enhanced by robot-assisted production lines and increased automation, which should allow ADF to comply with manufacturing standards.

Is ADF Group stock undervalued?

Analysts expect ADF Group to increase revenue from $251 million in fiscal 2023 to $337.2 million in fiscal 2025, while adjusted earnings are forecast at $0.95 per share for the next fiscal year. So, priced at 0.8 times forward sales and 9.2 times forward earnings, ADF stock is quite cheap.

A growing earnings base and improving profit margins should help ADF Group drive future cash flows higher. Analysts remain bullish on the TSX stock and expect it to surge over 14% in the next 12 months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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